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Stop FPIs from short-selling stocks, Sebi tells custodians

SLB mechanism, introduced about a decade ago, had permitted FPIs to sell borrowed shares.

Updated: Dec 13, 2019, 08.46 AM IST
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Capital market regulator Securities & Exchange Board of India (Sebi) has recently alerted custodians that it has come across instances where such trades have taken place.
Some of the foreign portfolio investors (FPI) are believed to have indulged in shortselling stocks — selling shares which they don’t have.

Capital market regulator Securities & Exchange Board of India (Sebi) has recently alerted custodians that it has come across instances where such trades have taken place.

In an email to foreign and local custodians, which function as a vital link between offshore funds and the Indian stock market, Sebi has told them to adhere to the regulatory guidelines which bar FPIs from such shortselling in the Indian market.

“It’s possible that Sebi may have spotted some trades in the course of inspection but it may not be a widespread phenomenon,” a person familiar with the subject told ET.

Simply put, one such trade can be where an FPI buys stock on Monday (under the existing T plus 2 settlement system) and sells the shares on Tuesday even before the shares have come into the fund’s stock demat account.

Sebi snip 2

ET’s email to a Sebi spokesperson went unanswered till the time of going to press.

The Sebi communication, which came a fortnight ago, closely follows the operational guidelines released by the regulator on November 5 for FPIs and designated depository participants.

The guidelines reiterate the regulation which categorically states: “FPIs are not allowed to short-sell in Indian market except as allowed under Securities Lending & Borrowing (SLB) or any other framework specified by the Board. Further, sales against open purchases are not permitted for FPIs and FPIs can sell such securities only after their settlement.”

SLB mechanism, introduced about a decade ago, had permitted FPIs to sell borrowed shares. Prior to that, short-selling was disallowed in all forms. “Earlier, some custodians had taken an aggressive interpretation of the regulation to allow shares even before settlement of buy trade. Such sale trades were allowed soon after a custodian confirms the buy trade as there was a clear visibility of the buy trade…But this may have largely stopped,” said a market source.

Custodians have to confirm trades by 1pm the next day by when they are certain that the FPI has initiated the foreign exchange conversion and the process to arrange funds. Under the rules, a custodian cannot confirm a sale trade even after 1 pm by when the buy trade has been confirmed. Once confirmed, the obligation to settle the trade shifts from the stock broker to the custodian.

If an FPI does a simultaneous buy and sell trade, the transactions have to be confirmed separately by a custodian. Thus, unlike local traders, offshore investors are not allowed intra-day netting of trades which does not result in delivery obligation.

As per latest guidelines, FPIs would be permitted to acquire “to be listed” shares following initial public offer (IPO), follow-on public offer (FPO), rights issue, private placement or shares received through corporate actions such as merger or demerger. Purchase of equity shares of each company by a single FPI or an investor group is capped at 10% of the company’s total paid-up equity capital on a fully diluted basis.

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